Another potential pitfall besides the strong as-is language in REO purchases, is the lack of knowledge the bank has about the condition. You will be relying heavily on your inspector, since the "seller" never lived in the property, knows nothing about its history, and denies every sort of liability for any defects.
A normal seller (e.g. owner) will disclose the defects and history as he knows them. Banks typically are not even required to disclose a thing.
The advantage of REOs is that they must sell at or below market. Often below. A pig in a poke gets a lower price than one with a seller telling you what he knows and being on the hook for hiding defects. Also, cosmetics and even minor repairs are often overvalued by buyers, meaning they think it will cost a lot more than it does to fix something or they won't even consider a property with the wrong colors or wallpaper in it, resulting in lower demand and pricing.
If you're willing to do your homework, can find a reliable inspector and good contractor(s), and you can look past defects to what a property could be after you've spent a known amount of money, you can really win with REOs.
The listing service usually identifies the seller type, but more importantly you should ask your Realtor for all the properties that are priced below market. If the list is too big, then ask her to trim it down by area and sort it by price. It really doesn't matter if the property is REO, short sale, distressed (such as a divorce, estate sale or a seller with 2 mortgages). What matters is your potential equity. Just recognize that REOs have a little more risk of unknown defects than other types of sellers.
REO vs. Foreclosure
An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. You see, most foreclosure auctions do not even result in bids. After all, if there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank. That is why the property ends up at a foreclosure or trustee sale.
Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney's fees and any costs association with the foreclosure process. In order to bid at a foreclosure auction, you must have a cashier's check in your hand for the full amount of your bid. If you are the successful bidder, you receive the property in "as is" condition, which may include someone still living in the property. There may also be other liens against the property.
Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. Then the property "reverts" to the bank. It becomes an REO, or "real estate owned" property.
article by Walt Harvey -